Dairygold warns of 'significantly lower' milk prices if expansion plans rejected at special general meeting in Mallow next Thursday

DAIRYGOLD is warning that a failure to endorse its controversial milk supply agreement will result in a ‘significantly lower milk price’. The co-op, which is holding a vote on the matter at its special general meeting (SGM) at its Mallow site on Thursday, April 11th, said that expanding milk production in preparation for the post-quota era is the ‘most critical task’ facing the group.

The milk supply agreement obliges suppliers to commit to the financing of a €120m expansion plant at Dairygold’s Mallow plant. A minority of milk suppliers have objected to the plans, with the Dairygold Milk Suppliers and Shareholders Group (DMSSG) urging the co-op to ‘proceed with caution’.

Dairygold said that the ending of milk quotas in 2015 brings to an end over 30 years of restrictions and penalties on excess milk production. Surveys of Dairygold milk suppliers indicate intent to expand milk production by 55% to 60% over 2011 volumes by 2020. ‘In keeping with its co-operative ethos’, Dairygold added, it has ‘committed to accepting all the milk its members will produce.’

The society said its expansion plan follows nearly two years of extensive planning and consultation. The additional investment required to fund its expansion plan will be funded through a ‘prudent’ mix of bank and member funding.

Referring to the society’s post-quota plan, Dairygold chief executive Jim Woulfe said; ‘The new agreement will ensure we will be in a position to process all of our members’ milk and that the additional capacity is utilised as efficiently as possible, minimising risk and maximising returns. The agreement will give us the certainty required to realise the opportunities presented by the post-quota era.’

The majority of milk suppliers wish to expand milk production to avail of the potential for increased farm income offered by the post-quota era, he said. ‘This is a time of great change and opportunity for dairy farmers and the financial strength we have carefully built up in Dairygold over recent years, together with our expansion strategy, positions us well to reap the rewards that substantial dairy expansion over the next seven years will offer.’

The consequences of the society’s post-quota plan not being endorsed are many, Dairygold warned. An underperforming business would end up paying a ‘significantly lower’ milk price. There would be no strategy in place for the post-quota era, and the capital investment programme would be shelved. Processing capacity would not be aligned with milk volumes, while extra unplanned volumes would be sold as ‘distressed milk’ at a lower price.

Rejection of the plan would result in a ‘significantly weakened’ negotiating position within the industry, and a loss of market opportunities and reputational damage with customers. Lenders, too, would lose confidence, with ‘implications for the facilities already secured’. There would be legal limbo with 2,400 milk supply agreements already signed, and an inability to fund share redemption at the increased levels agreed.

Concerns

The DMSSG said that its members are ‘are progressive dairy farmers’ who ‘totally support the principle of growth in milk production where it can be realistically achieved.’

However, Dairygold has not explained how it came up with its costings, the group said. ‘Getting this wrong could mean us having to service a debt of €240m over the next 12 years’, it warned. ‘This loan will have to be paid back and the only means of making that repayment is to take it from the litre of milk’.

Dairygold’s Macroom plant has the largest dryer of its kind in the world, the DMSSG said, and it is ‘very unfair’ to claim that the co-op may not have enough production capacity for 2015.

No one is predicting ‘an immediate increase of more than this until well after 2015’, it added.

The group also cautioned that the possibility of farmers moving their supply from Dairygold as a result of the milk supply agreement had been ‘totally overlooked’.

It said it was aware of one group of farmers who, if not allowed transfer to another co-op, are looking at the prospect of building their own milk processing plant.

Dairygold said that its ‘independently verified and stress-tested’ financial plan to 2020, ‘ensures bank borrowing for current activities will not be in excess of €100 million at the end of any year and ensures the society is in control of its own destiny’.